M.

COM-FC 311 Unit-III Lesson-12

MUTUAL FUNDS IN INDIA

STRUCTURE

12.1 Introduction

12.2 Objectives

12.3 Importance of Mutual Funds

12.4 Estimation of Net Asset Value of Mutual Funds

12.5 SEBI Guidelines on Mutual Funds

12.6 Mutual Funds in India

12.7 Summary

12.8 Glossary

12.9 Self Assessment Questions

12.10 Lesson End Exercises

12.11 Suggested Readings

12.12 References

12.1 INTRODUCTION

Mutual funds have emerged as the best in terms of variety, flexibility,

diversification, liquidity as well as tax benefits. Besides, through mutual
funds investors can gain access to investment opportunities that would otherwise

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 be unavailable to them due to limited knowledge and resources. Mutual funds
have the capability to provide solutions to most investors' needs, however, the
key is to do proper selections and have a process for monitoring.

In order to protect the interest of the investors, SEBI formulates policies and
regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996)
and issued guidelines from time to time. Mutual fund either promoted by public
or by private sector entities are governed by these regulations. As a result, the
Indian mutual fund industry witnessed robust growth and stricter regulation from
SEBI since 1996.

12.2 OBJECTIVES

After studying this lesson, you will be able to:

 Discuss significance of mutual funds.

 Calculate net asset value of mutual fund.

 Know about evolution of mutual funds in India.

12.3 IMPORTANCE OF MUTUAL FUNDS

The mutual fund industry has grown at a phenomenal rate in the recent past.
One can witness a revolution in the mutual fund industry in view of its importance
to the investors in general and the country's economy at large. The importance
of mutual funds are discussed below:

1. Channelizing Savings for Investment

Mutual funds act as a vehicle in galvanizing the savings of the people by offering
various schemes suitable to the various classes of customers for the development
of the economy as a whole. A number of schemes are being offered by mutual
funds so as to meet the varied requirements of the masses, and thus, savings are
directed towards capital investments directly. In the absence of mutual funds,
these savings would have remained idle. Thus, the whole economy benefits due
to cost-efficient and optimum use and allocation of scarce financial and real

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resources in the economy for its speedy development.

2. Diversified Investment

Small investors cannot afford to purchase the shares of the highly established
companies because of high market price. The mutual funds provide this
opportunity to small investors. Even a very small investor can afford to invest in
mutual funds. The investors can enjoy the wide portfolio of the investments held
by the fund. It diversifies its risks by investing in a variety of securities (equity
shares, bonds etc.) The small and medium investors cannot do this.

3. Provide Better Beturns

Mutual funds can pool funds from a large number of investors. In this way huge
funds can be mobilized. Because of the huge funds, the mutual funds are in a
position to buy securities at cheaper rates and sell securities at higher prices.
This is not possible for individual investors. In short, mutual funds are able to
give good and regular returns to their investors.

4. Better Liquidity

At any time the units can be sold and converted into cash. Whenever investors
require cash, they can avail loans facilities from the sponsoring banks against
the unit certificates.

5. Rendering Expertise Investment Service at Low Cost

The management of the fund is generally assigned to professionals who are well
trained and have adequate experience in the field of investment. The investment
decisions of these professionals are always backed by informed judgment and
experience. Thus, investors are assured of quality services in their best interest.
Due to the complex nature of the securities market, a single investor cannot do
all these works by himself or he cannot go to a professional manager who
manages individual portfolios. In such a case, he may charge hefty management
fee. The intermediation fee is the lowest being 1 percent in case of a mutual
fund.

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6. Reduce Risk

There is only a minimum risk attached to the principal amount and return for the
investments made in mutual funds. This is due to expert supervision, diversification
and liquidity of units.

7. Providing Research Services

A mutual fund is able to command vast resources and hence it is possible for it
to have an in-depth study and carry out research on corporate securities. Each
fund maintains a large research team which constantly analyses the companies
and the industries and recommends the funds to buy or sell a particular share.
Thus, investments are made purely in the basis of thorough research. Since
research involves a lot of time, efforts and expenditure, an individual investor
cannot take up this work. By investing in a mutual fund, the investor gets the
benefit of the research done by the fund.

8. Offer Tax Benefits

Mutual funds offer tax benefits to investors. For instance, under section 80 L of
the Income Tax Act, a sum of ` 10,000 ( ` 13000 to UTI) received as dividend
from a mutual fund is deductible from the gross total income. Under section 88
A, 20 percent of the amount invested is allowed to be deducted from the tax
payable. Under the Wealth Tax Act, investments in mutual fund are exempted
up to ` 5 lakh.

The mutual funds themselves are totally exempt from tax on all income on their
investments. But all other companies have to pay taxes and they can declare
dividends only from the profits after tax. But, mutual funds do not deduct tax at
source from dividends. This is really a boon to investors.

9. Support Capital Market

Mutual funds play a vital role in supporting the development of capital markets.
The mutual funds make the capital market active by means of providing a
sustainable domestic source of demand for capital market instruments. In other

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words, the savings of the people are directed towards investment in capital
markets through these mutual funds. They also provide a valuable liquidity to
the capital market. In this way, the mutual funds make the capital market active
and stable. When foreign investors and speculators exit and re-enter the markets
en masse, mutual funds keep the market stable and active.

10. Promote Industrial Development

The economic development of any nation depends upon its industrial

advancement and agricultural development. Industrial units raise funds
from capital markets through the issue of shares and debentures. Mutual
funds supply large funds to capital markets. Besides, they create demand
for capital market instruments (share, debentures etc.). Thus mutual funds
provide finance to industries and thereby contributing towards the economic
development of a country.

11. Keep the Money Market Active

An individual investor cannot have any access to money market instruments

since the minimum amount of investment is out of his reach. On the other
hand, mutual funds keep the money market active by investing money on
the money market instruments. In fact, the availability of more money
market instruments itself is a good sign for a developed money market
which is essential for the successful functioning of the central bank in a
country.

12. Reducing the Marketing Cost of New Issues

The mutual funds help to reduce the marketing cost of the new issues. The
promoters used to allot a major share of the initial public offering to the mutual
funds and thus they are saved from the marketing cost of such issues.

13. Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations

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 of Mutual Funds are regularly monitored by SEBI.

12.4 ESTIMATION OF NET ASSET VALUE OF MUTUAL FUNDS

The Net asset value (NAV) is the market price of each unit of a particular
scheme in relation to all the assets of the scheme. It can otherwise be called
'the intrinsic value' of each unit. This value is a true indicator of the
performance of the fund. If the NAV is more than the face value of the
unit, it clearly indicates that the money invested on that unit has appreciated
and the fund has performed well.

Illustration

For instance, Fortune Mutual Fund has introduced a scheme called

Millionaire Scheme. The Scheme size is ` 100 crore. The value of each
unit is ` 10. It has invested all the funds in shares and debentures and the
market value of the investment comes to ` 200 crore.

Now, NAV=

= 2×10=20

Thus, the value of each unit is ` 10is worth ` 20.

Hence, the NAV= ` 20.

This NAV forms the basis for fixing the repurchase price and reissue price.

The investor can call up the fund any time to find out the NAV. Some
mutual funds publish the NAV weekly in two or three leading daily newspapers.

12.5 SEBI GUIDELINES ON MUTUAL FUNDS

Mutual funds in India are now governed under the Securities and Exchange
Board of India (mutual fund) Regulations,1996. SEBI has provided a four tier
system for managing the affairs of mutual funds. The four constituents in the
organisation of a mutual fund are:

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1. The Sponsoring Company, called Sponsor

SEBI (mutual funds) Regulations define Sponsor as any person who acts alone
or in combination with another body corporate, establishes a mutual fund. SBI
Mutual fund is sponsored by State Bank of India. LIC MF is sponsored by Life
Insurance Corporation (LIC) of India. Sponsors have to comply with the
following regulations laid down by SEBI.

a) Application and fee: A sponsor has to file an application for registration

of a mutual fund in the prescribed form along with an application with fee
of Rs.100000. The sponsors must furnish all information and give
clarifications as may be required by the board.

b) Eligibility criteria: The sponsor may be granted a certificate of registration

provided following conditions are satisfied :

i) The sponsor has a sound track record and general reputation of fairness
and integrity in all his business transactions for not less than 5 years.

ii) The sponsor has contributed at least 40% of the worth of Asset
Management Company (AMC).

iii) A trustee has been appointed by the sponsors who will act as trustee
for the mutual fund.

iv) An AMC is appointed to manage and operate the scheme of such funds.

v) A custodian is appointed to keep custody of the securities and carry

out the custodian activities.

c) Grant of certificate of registration.

d) Annual fee.

2. The trustees

SEBI (mutual fund) Amendment regulations 1999 defines trustee as "a person
who holds the property of the mutual fund in trust for benefit of the unit-holders

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 and includes a trustee company and the directors of the trustee company." SEBI
(mutual fund) regulations, 1996 from 16 to 18 contain guidelines with regard to
operation of trustees

3. Asset management company (AMC)

SEBI regulations require that mutual funds be managed by a separate body

corporate. The sponsor or the trustee shall appoint an AMC. The application
for the approval of AMC has to be made in Form D. The appointment of
AMC can be terminated by majority of the trustees or by 75% of the unit-
holders of the scheme. Any change in the appointment of AMC requires
the prior approval of the Board and the unit-holders.

4. Custodian

Custodian is defined under SEBI (mutual funds) Regulations, 1996 as " a

person who has been granted a certificate of registration to carry on the
business of custodian of securities under the securities and Exchange Board
of India (custodian of securities) Regulations, 1996. Custodian provides
custodial services and ensures safe-keeping of securities. He performs the
following functions.

a) Maintains accounts of securities of a client.

b) Collects the benefits or rights accruing to the client in respect of

securities.

c) Maintains and reconciles the records of securities.

d) Helps in transfer of the securities in the name of trust.

e) Prevents any manipulation of records and documents.

12.6 MUTUAL FUNDS IN INDIA

In India, the mutual fund industry has been monopolized by the Unit Trust of
India ever since 1963. Now, the commercial banks like the State Bank of India,
Canara Bank, Indian Bank, Bank of India and the Punjab National Bank have
entered into the field. To add the list
256are the LIC of India and the private sector
banks and other financial institutions. These institutions have successfully launched
a variety of schemes to meet the diverse needs of millions of small investors.
The Unit Trust of India has introduced huge portfolio of schemes like Unit 64,
Mastergain, Mastershare, etc. It is the country's largest mutual fund company
with over 25 million investors.

Kothari Pioneer was the first private sector mutual fund company in India which
has now merged with Franklin Templeton. Just after ten years with private sector
player's penetration, the total assets rose up to 1218.05 billion. Today there
are 33 mutual fund companies in India.

The major mutual fund companies in India are being discussed below:

1. ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO
Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO
Asset Management (India) Ltd. was incorporated on November 4, 2003.
Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

2. Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun
Life Financial. Sun Life Financial is a global organization evolved in 1871 and is
being represented in Canada, the US, the Philippines, Japan, Indonesia and
Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative
long-term approach to investment. Recently it crossed Assets Under
Management (AUM) of 10,000 crores.

3. Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was set up on October 30,
1992 under the sponsorship of Bank of Baroda. BOB Asset Management
Company Limited is the AMC of BOB Mutual Fund and was incorporated
on November 5, 1992. Deutsche Bank AG is the custodian.

4. ING Vysya Mutual Fund

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 ING Vysya Mutual Fund was setup on February 11, 1999 with the same named
Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING
Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

5. Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one
of the largest life insurance companies in the US of A. Prudential ICICI Mutual
Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc.
and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd.
and the AMC is Prudential ICICI Asset Management Company Limited
incorporated on 22nd of June, 1993.

6. State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to
launch offshore fund, the India Magnum Fund with a corpus of 225 crores
approximately. Today it is the largest Bank sponsored Mutual Fund in India.
They have already launched 35 Schemes out of which 15 have already yielded
handsome returns to investors. State Bank of India Mutual Fund has more than
5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread
over 18 schemes.

7. Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003,
manages the UTI Mutual Fund with the support of UTI Trustee Company
Private Limited. UTI Asset Management Company presently manages a corpus
of over 20000 Crores. The sponsors of UTI Mutual Fund are Bank of Baroda
(BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life
Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are
Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity
Funds and Balance Funds.

8. Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 is sponsored
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 by Standard Chartered Bank. The Trustee is Standard Chartered Trustee
Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd.
is the AMC which was incorporated with SEBI on December 20, 1999.

Today, mutual funds have started playing a positive role in the country's saving
revolution.

No doubt, mutual funds have become a very popular investment vehicle for
small investors. The dominance of retail mutual fund industry can be seen from
the following analysis of folios of mutual funds.

Table 12.1: Number of Folios of Mutual Funds

Category March 2010 September 2010 March 2011

Corporates 3,77,519 3,59,372 3,91,836
Bank/FIs 3,671 11,315 11,883
Foreign Institutional Investors 133 134 130
High Net Worth Individuals 6,56,334 7,05,199 7,79,226
Retail Investors 4,69,26,405 4,59,02,299 4,60,51,758
Total 4,79,64,062 4,69,78,319 4,72,34,833

Source: Association of Mutual Funds in India.

As of March 2018, individual investors held 55 per cent of the total mutual fund
assets in India. The number of small retail investors has grown to 67 million as
of March 2018 from 46.4 million in March 2009, taking their share of total
assets to 25 per cent from 21 per cent. The share of high net worth individuals
(HNIs) in total assets has risen to 30 per cent from 22 per cent, as their folio
count increased nearly seven-fold to 3.9 million from 0.6 million.

12.7 SUMMARY

The mutual fund industry has grown at a phenomenal rate in the recent past.
One can witness a revolution in the mutual fund industry in view of its importance
to the investors in general and the country's economy at large.

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 In India, the mutual fund industry has been monopolized by the Unit Trust of
India ever since 1963. Now, the commercial banks like the State Bank of India,
Canara Bank, Indian Bank, Bank of India and the Punjab National Bank have
entered into the field. To add the list are the LIC of India and the private sector
banks and other financial institutions.

Kothari Pioneer was the first private sector mutual fund company in India which
has now merged with Franklin Templeton. Just after ten years with private sector
player's penetration, the total assets rose up to 1218.05 billion. Today there are
33 mutual fund companies in India.

12.8 GLOSSARY

 Net Asset Value: The Net asset value (NAV) is the market price of each
unit of a particular scheme in relation to all the assets of the scheme.

 Money Market: A money market is a mechanism through which short

term funds are loaned and borrowed and through which a large part of
the financial transaction of a particular country or of the world are
cleared.

 Capital Market: The term capital market refers to the institutional

arrangements for facilitating the borrowing and lending of long-term
funds.

 Sponsor: As per SEBI (mutual funds) Regulations, sponsor is any

person who acts alone or in combination with another body corporate,
establishes a mutual fund.

12.9 SELF ASSESSMENT QUESTIONS

1. What do you mean by Net Asset Value? How is it computed?

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 _________________________________________________________

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2. Write short notes on:

a) State Bank of India Mutual Fund

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b) Unit Trust of India Mutual Fund

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12.10 LESSON END EXERCISES

1. Define mutual funds. Explain its importance.

2. Discuss the status of mutual fund in India.

12.11 SUGGESTED READINGS

1. Chandra Prasanna, Investment Analysis and Portfolio Management, McGraw

Hill.

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2. Francis and Archer, Portfolio Management, Prentice Hall of India.

12.12 REFERENCES

1. E. Gordon and K. Natarajan, Financial Markets and Services, Himalaya

Publishing House.

2. V K Bhalla, Fundamentals of Investment Management, S. Chand.

3. Punithavathy Pandian, Securities Analysis and Portfolio Management,

Vikas Publishing House Pvt Ltd.

4. Shashi K. Gupta and Rosy Joshi, Securities Analysis and Portfolio

Management (Investment Management), Kalyani Publishers.

5. V. A. Avadhani, Investment Management, Himalaya Publishing House.

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